The 7 steps to an effective budget and the beginning of your financial freedom

If you make $5 and spend $6, you are broke and sad.  If you make $5 and spend $4, you have extra money and you are happy.

A budget is one of the first steps to start down the road to Financial Freedom.  Successful companies spend allot of time setting and following budgets and so should you.  A budget is a plan of how you are going to allocate the money you are making.  It is important to know how much you are making compared to how much you are spending.  If you do not understand this, then you risk becoming broke or deeply in debt.  A budget will enable you to prioritize your spending so you have enough money to cover your expenses, contribute to a rainy day fund and even have some set aside for your future.

Here are the steps for putting together an effective budget:

  1. Determine your total income. Pull all your sources of income over the month and determine your after tax income. If you have paystubs, it will be on those.  If your monthly income fluctuates, then use the average of at least 3 months or take your previous year’s total after tax income and divide by 12 months.
  2. Determine your regular expenses. List out all your regular expenses like rent, mortgage payments, property tax, insurance, car payments, loan repayments, child support, alimony, groceries, cell phone, subscriptions, etc.
  3. Determine your seasonal expenses. Pull together all the seasonal expenses like birthdays, Christmas, and other annual expenses for events.
  4. Document everything.  Put all that information into a budget document or application.  Once it is in the laid out you should be able to see a total of how much you are making and subtract how much you are spending. I hope that you are making more than what you are spending.
  5. Reduce expenses. Review your expenses and see what can be reduced or eliminated. Be honest with yourself and separate the “Needs” from “Wants” so that you can get rid of as many “want” items as possible. Why? Because want items are not necessary and just burn your hard earned money.

Ask yourself questions like:  Can you trade in the expensive vehicle for a cheaper one?  Do you need to pay for the storage unit with the junk that you have not looked at in years? Do you need that unlimited cell phone plan?  Do you really need all those entertainment subscriptions? Can you spend less on those gifts or events? Allot of people are busy keeping up with the neighbours and have expensive cars, homes or other items that risk their financial wellbeing.

All those small easy monthly payments add up quickly and put you in the poor house.  Keep in mind that reducing expenses is like making more money.

  • Set financial goals. Now you can start on the planning phase of your budget.  Determine your financial goals and include them in your plans.  The best thing to do with your financial goals is to set up an automatic transfer into a savings or investment account when you get paid.  This way you do not even have the temptation to spend it on something frivolous. If one of your goals is to save for a house or vacation, then it is a good idea to have a separate saving account for that goal.  Make sure you set realistic goals on how much you need to set aside.

Your plan should include building a rainy day fund that is large enough to carry yourself for at least a month. 

By planning for those larger purchases, you will enjoy a few other benefits. You will reduce the amount of debt you need to pay for these things and as a result your financing charges will be lower or eliminated. With less debt, you will be able to save more money. By having better control of your budget and finances, you will have less stress in your life and you will be happier.

Review and update. Review the budget and your goals regularly.  No budget is complete without self-discipline.

Here are a list of some of the best budgeting apps that will help you keep track of you budget and help you work towards your goals. Most are free and some charge an uplift for added features.

Mint – This is a highly rated free app from Intuit who also makes QuickBooks and TurboTax.

PocketGuard – PocketGuard’s objective is to “show how much spendable money you have after setting aside enough for bills, goals and necessities.”

Goodbudget – Goodbudget is great if you want to sync and share your budget with your significant other.

YNAB – You Need A Budget’s objective is to “teach you how to prioritize and plan, so you have money for the things that are most important to you.”

Wally – Wally is focused on budgeting and allows you to track expenses manually or by taking a picture of your receipt.

Menvelopes – Menvelopes is modelled on an envelope style of budgeting so it allows you to put money into as many envelopes as you want. It is not a free app but does offer a 30 day trail and a free financial wellness assessment.

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